Critical Renovations And Market Adaptations Position Hospitality Giant For Revenue Resurgence

Key Takeaways

• Improvements in demand across corporate and group segments hint at revenue growth potential as these markets further recover.
  
• Strategic property renovations and acquisitions aim to enhance guest attraction and generate higher earnings, despite a cautious short-term market outlook.
  
• Renovation risks, increased capital expenditures, and softening leisure demand could strain cash flows and impact margins, indicating potential revenue volatility and operational inefficiencies.

Catalysts

A self-advised and self-administered REIT that invests in uniquely positioned luxury and upper upscale hotels and resorts with a focus on the top 25 lodging markets as well as key leisure destinations in the United States.

• Improvement in corporate transient and group demand in many markets indicates potential for revenue growth as these segments recover further.
  
• Significant investment in renovations, notably the transformation of Hyatt Regency Scottsdale into the Grand Hyatt Scottsdale Resort, is expected to enhance the property's appeal and drive higher rates and occupancy, positively impacting revenue and net margins.
  
• The completion of capital expenditure projects, including renovations at other properties, suggests an increase in the portfolio's competitive edge and attractiveness to guests, likely boosting revenue.
  
• Strategic dispositions and acquisitions, such as the sale of the Lorien Hotel & Spa, demonstrate prudent capital allocation which can reallocate resources to more accretive opportunities, supporting earnings growth.
  
• A cautious outlook for the remainder of the year due to market uncertainties, while maintaining a long-term optimistic view on the portfolio's performance, suggests careful management and potential for margin improvement as conditions improve.

Assumptions

• Analysts are assuming Xenia Hotels & Resorts's revenue will grow by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.2% today to 3.1% in 3 years time.
• Analysts expect earnings to reach $35.2 million (and earnings per share of $0.23) by about September 2027, up from $22.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $41.7 million in earnings, and the most bearish expecting $22.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 56.1x on those 2027 earnings, down from 60.4x today. This future PE is greater than the current PE for the US Hotel and Resort REITs industry at 18.6x.
• Analysts expect the number of shares outstanding to decline by 3.02% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.54%, as per the Simply Wall St company report.

Risks

• The significant renovation and transformation of Hyatt Regency Scottsdale into the Grand Hyatt Scottsdale Resort might not achieve the anticipated earnings growth due to softening leisure demand, potentially impacting future revenues and margins.
  
• The increase in capital expenditure from $125 million to $135 million, primarily due to the Scottsdale project, could strain cash flows and impact net margins if the anticipated return on investment does not materialize as expected.
  
• A decrease in second-quarter hotel EBITDA by 7.5% and a 238 basis points decrease in hotel EBITDA margin could indicate underlying operational inefficiencies or market pressures that might persist, affecting net margins.
  
• The reliance on favorable leisure and group demand segments, with a noted softening in leisure demand, might result in revenue volatility, impacting earnings stability and growth prospects.
  
• Increased caution and lowered expectations for adjusted EBITDAre for 2024 reflect operational and market uncertainties that could hinder earnings growth, impacting net margins and overall financial performance.

Valuation

• The analysts have a consensus price target of $15.93 for Xenia Hotels & Resorts based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $18.0, and the most bearish reporting a price target of just $12.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.1 billion, earnings will come to $35.2 million, and it would be trading on a PE ratio of 56.1x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $13.4, the analyst's price target of $15.93 is 15.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.